On March 21, the Securities and Exchange Commission (SEC) voted 3-1 to issue a proposal requiring public companies to provide investors with more detailed disclosures on climate risk and greenhouse gas (GHG) emissions. This includes, in some cases, so-called “Scope 3” indirect emissions.
How would the disclosures be expanded?
The proposal, which applies to domestic and foreign registrants, would require the new disclosures in annual reports and registration statements. The climate-related disclosures under Regulation S-K would be provided in a separate section in the registration statement or annual report. And the climate-related financial statement metrics and related disclosures under Regulation S-X would be included in a note to the consolidated financial statements.
Accelerated and large accelerated filers would be required to obtain an attestation report that covers at least the disclosures of the company’s Scope 1 direct emissions and Scope 2 indirect emissions, which are emissions that stem from energy consumed by the company.
Furthermore, all registrants would need to disclose separately those Scope 1 and Scope 2 emissions both “by disaggregated constituent greenhouse gases and in the aggregate” and in “absolute and intensity terms.” The rule defines GHG intensity as a ratio expressing the impact of GHG emissions per unit of economic value or per unit of production.
A registrant would need to disclose its Scope 3 emissions from suppliers and partners — essentially any indirect emissions that fall outside of Scope 2 — if that information is material, or if it has set emissions goals that include Scope 3 emissions. The companies would also be provided a safe harbor for liability for those Scope 3 disclosures.
Other disclosures required under the proposal include:
- Oversight and governance of climate-related risks by a company’s board and management,
- How identified climate risks have had or are likely to have a material impact on the business and consolidated financial statements,
- The processes for identifying, assessing and managing climate risk, and
- The impact of climate-related events, such as severe weather and transition activities, on the line items of consolidated financial statements and related expenditures.
More broadly, public companies would be required to disclose the “actual or likely material impacts” climate-related risks will have on the company’s business, strategy and outlook. This could include physical risks, as well as new regulations such as a carbon tax.
The SEC is proposing to phase in the new requirements over the next few years depending on filer status. Implementation would begin for large accelerated filers in fiscal 2023 for all proposed disclosures outside of the Scope 3 disclosures. In turn, large accelerated filers would be required to provide Scope 3 disclosures a year later. In addition, the SEC is proposing Scope 3 carve-outs based on a company’s size.
What’s so controversial?
Democratic lawmakers praised the proposal as a critical step toward providing investors with consistent and comparable climate risk data. However, it was met with criticism by Republicans and the business lobby.
Commissioner Hester Peirce, the lone Republican on the SEC who dissented to the proposal, issued a lengthy statement. She argued that the SEC was operating outside of its authority and warned, “We can’t make such fundamental changes without harming investors, the economy, and this agency.”
Some corporate groups have argued there’s no agreed methodology for calculating Scope 3 emissions. They also argue that providing so much detail would be burdensome and would expose companies to costly litigation if the third-party data ends up being wrong.
The U.S. Chamber of Commerce, in its own statement, said it is “concerned that the prescriptive approach taken by the SEC will limit companies’ ability to provide information that shareholders and stakeholders find meaningful while at the same time requiring that companies provide information in securities filings that are not material to investors.”
“The Supreme Court has been clear that any required disclosures under securities laws must meet the test of materiality, and we will advocate against provisions of this proposal that deviate from that standard or are unnecessarily broad,” the Chamber stated.
On the flip side, environmental and financial reform groups cheered the SEC’s move. Americans for Financial Reform called the proposed mandatory climate disclosures “squarely within the SEC’s mandate and responsibility.” The Sierra Club praised the SEC for taking the “long-overdue step of proposing a solution to the problem of undisclosed climate risks.”
Another proponent is SEC Chair Gary Gensler. In remarks prior to the vote, Gensler said, “Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent, comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors on one side and issuers on the other.”
Stay tuned
Comments on the proposal are due 30 days following publication in the Federal Register or 60 days following issuance and publication on the SEC’s website, whichever is later. Contact your CPA if you have any questions.
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